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Wednesday, February 01, 2017

Stocks Manage Mild Gains as Fed Holds Steady

Charles Schwab: On the Market

Posted: 2/1/2017 4:15 PM ET

Stocks Manage Mild Gains as Fed Holds Steady

U.S. stocks managed to finish with mild gains amid some favorable
earnings results from Dow component Apple and a host of upbeat
manufacturing reports out of China, Europe and the U.S. Investors seemed
cautious ahead of today's Fed monetary policy decision, which showed
the Central Bank will hold its current target rate range. Crude oil
prices and the U.S. dollar were higher, while Treasuries and gold were
lower.

The Dow Jones Industrial Average (DJIA) increased 27 points (0.1%) to
19,891, the S&P 500 Index was nearly unchanged at 2,279, and the
Nasdaq Composite advanced 28 points (0.5%) to 5,643. In moderately heavy
volume, 903 million shares were traded on the NYSE and 2.2 billion
shares changed hands on the Nasdaq. WTI crude oil ticked $1.07 higher to
$53.88 per barrel and wholesale gasoline added $0.03 to $1.58 per
gallon. Elsewhere, the Bloomberg gold spot price declined $6.47 to
$1,212.17 per ounce, and the Dollar Index—a comparison of the U.S.
dollar to six major world currencies—increased 0.2% to 99.51.

The Institute for Supply Management (ISM) Manufacturing Index (chart)
for January moved farther into expansion territory (above 50) than
expected after rising to 56.0—the highest since November 2014—from
December's 54.5 level, and compared to the Bloomberg forecast of a
modest rise to 55.0. Production and new orders both improved to levels
north of 60, and growth in employment accelerated. Prices rose to 69.0
from 65.5, and inventories increased but remained in contraction
territory. Amid the backdrop of the strong U.S. dollar, new export
orders decreased but remained above 50. The ISM said comments from the
survey were generally positive regarding demand levels and business
conditions.

The final Markit U.S. Manufacturing PMI Index was revised
slightly lower to 55.0 for January from the 55.1 preliminary level,
where it was expected to remain. However, the index is up from the 54.3
level posted in December. A reading above 50 denotes expansion. The
release is independent and differs from ISM's manufacturing report, as
it has less historic value and Markit weights its index components
differently.

The ADP Employment Change Report showed private sector payrolls
rose by 246,000 jobs in January, well above the Bloomberg forecast of a
168,000 gain, while December's increase of 153,000 jobs was revised
slightly lower to a 151,000 rise. Today’s ADP data, which does not
include government hiring and firing, comes ahead of Friday's broader
January nonfarm payroll report, expected to show an increase of 175,000 jobs, while private sector payrolls are projected to rise by 170,000 (economic calendar). The unemployment rate is forecasted to remain at 4.7%, and average hourly earnings are projected to rise 0.3% month-over-month (m/m).

Today's manufacturing and employment data adds credence to our view in the latest Schwab Market Perspective: A New World,
that we believe the market's post-election gains were not solely
related to optimism about the pro-business leanings of the new
administration, but also reflected improving economic data and better
corporate earnings. Continued solid economic data and a decent earnings
reporting season bolster our confidence in the continuation of the bull
market in stocks. However, rising inflation, possibly forcing the Fed to
be more aggressive, could lead to bouts of volatility and more
pullbacks. Read more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting,
opting to keep the target range for the Fed funds rate unchanged at
0.50%-0.75%, as many had expected, after agreeing unanimously to raise
the target rate range at its December meeting. It was revealed in the
Federal Reserve's FOMC statement that "in view of realized and expected
labor market conditions and inflation, the Committee decided to maintain
the target range for the federal funds rate." There was no press
conference or updated economic projections following the decision. Be
sure to check out analysis of the Fed's decision from Schwab's Chief
Investment Strategist Liz Ann Sonders later today at www.schwab.com/marketinsight.

The MBA Mortgage Application Index declined 3.2% last week, following the previous week's 4.0% gain. The decrease came as the Refinance Index fell 1.4%, while the Purchase Index dropped 5.6%. The average 30-year mortgage rate rose 4 basis points (bps) to 4.39%.

Treasuries were lower, with the yield on the 2-year note gaining 1 basis
point (bp) to 1.22%, the yield on the 10-year note rising 3 bps to
2.48% and the 30-year bond rate advancing 2 bps to 3.08%.Treasury yields
and the U.S. dollar remain in focus with the global markets grappling
with the latest policy moves from President Donald Trump, and Schwab's
Vice President of Legislative and Regulatory Affairs, Michael T.
Townsend offers his latest article, 5 Themes to Watch as the Trump Era Begins, at www.schwab.com/insights.

Tomorrow's U.S. economic calendar will bring reports on weekly jobless claims, expected to have declined to 250,000 from the prior week's 259,000 level, and preliminary 4Q nonfarm productivity and unit labor costs, with productivity anticipated to have increased 1.0% on an annualized basis and costs forecasted to have risen 1.9%.

Europe snaps losing streak, Asia mostly higher following data

European equities gained ground, snapping a string of losses, with some
upbeat Chinese business activity reports being met with some favorable
eurozone and U.K. manufacturing data. The currency markets were in focus
ahead of today's monetary policy decision in the U.S. and amid
festering Brexit uncertainty, while U.S. President Donald Trump
criticized currency valuations in Japan, China and Germany. The euro
traded lower and the British pound moved higher versus the U.S. dollar,
while bond yields in the region traded to the upside. Earnings results
in the region were mostly upbeat to help sentiment, and the global tech
sector got a boost from results from Dow member Apple.

Stocks in Asia finished mostly higher ahead of the U.S. monetary policy
decision and some continued volatility in the currency markets following
comments from U.S. President Donald Trump that criticized the low
valuation of currencies in Japan, China and Germany. For more on Trump's
policies, see Schwab's Jeffrey Kleintop's, CFA, article, President Trump and Global Trade: How Will Campaign Promises Play Out? at www.schwab.com/oninternational, where you can also find Schwab's Director of International Research, Michelle Gibley's, CFA, latest article, Currency Hedging: 5 Things You Need to Know.
Some upbeat economic data in the region lent some support, with
manufacturing and services sector reports out of China both showing
growth accelerated in January, with the former topping estimates, while
South Korea posted a larger-than-expected jump in exports for last
month.

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